Crypto Securities: On the Risks of Investments in Blockchained-Based Assets and the Dilemmas of Securities Regulation

* Associate Research Scholar, Columbia Law School. Thanks for helpful comments and conversations go to Mike Burstein, Mirit Eyal-Cohen, Geeyoung Min, and to participants of the Law and Entrepreneurship Retreat at Alabama Law School, the Roundtable discussion at Fordham Center on Law and Information Policy, and the Associates Seminar at Columbia Law School. Special thanks to Eran Tromer, for decades of thought-provoking and fruitful conversations, including the inspiration for this paper.

Recent declarations and investigations by the Securities and Exchange Commission suggest that blockchain-based assets are potentially subject to regulation as securities under the Securities Act. This Article presents a systematic analysis of the risks and embedded costs of investments in blockchain-based assets and assesses their potential regulation as securities.

This Article offers a comprehensive account of the pertinent properties of blockchain-based assets, the technology of the blockchain, the markets available for their trade, and their varied underlying sources of value. It identifies unique costs and risk factors inherent to the blockchain technology, and examines whether securities laws can potentially add value and protect investors from these unique risks. Identified costs and risks factors include controlling costs prevalent even in decentralized ledgers, monitoring costs that vary according to the costs of automatic verification, technology risks rooted in the vulnerability of the blockchain to bugs in its software, and systemic risks embedded in limited transparency and contractual rigidity of the blockchain-based investment contract.

This Article examines these unique costs and risk factors and assesses their normative implications for securities regulation of blockchain-based assets. With current efforts by regulatory authorities to designate blockchain-based assets as securities, a coherent approach is presented based on the type of the offering, investors’ profile, and the technical and legal contours of the blockchain-based asset under assessment. The analysis proposes that securities regulators should target the identified costs and risk factors and assess the potential of securities regulation to protect investors, based on a structural and technical assessment of the blockchain-based asset under consideration and as balanced against the costs of securities regulation. The proposed approach is illustrated by examining several blockchain-based assets, including Bitcoin, Tezos, and Filecoin.